As I explained in my last post, Fiduciary Rule 51, I have been asked whether the Supreme Court’s decision in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce et al. could affect the outcome of the litigation about the validity of the DOL’s fiduciary regulation and related exemptions. The answer is “yes,” but perhaps not in the way you might think. This article discusses the Loper Bright decision in the context of a review of the DOL’s Prohibited Transaction Exemptions (PTEs) 84-24 and 2020-02.

To be fair, I am not an expert on constitutional law and I don’t want to create the impression that this is an authoritative article. Instead, my goal is to highlight the issues for consideration by the courts.

In the majority opinion in the Loper Bright decision, Chief Justice Roberts concluded:

Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the APA requires. Careful attention to the judgment of the Executive Branch may help inform that inquiry. And when a particular statute delegates authority to an agency consistent with constitutional limits, courts must respect the delegation, while ensuring that the agency acts within it. But courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous. (The bolding is mine and highlights the issues that I will discuss later in this article.)

As the bolded language suggests, an important question is whether ERISA delegates authority to the DOL to issue prohibited transaction exemptions and whether the conditions can include a standard of care (that is, did the Congressional delegation include that discretion).

Section 408(a) of ERISA grants the Secretary of Labor the authority to issue exemptions to the prohibited transaction rules. That section says:

1. Grant of exemptionsThe Secretary shall establish an exemption procedure for purposes of this subsection. Pursuant to such procedure, he may grant a conditional or unconditional exemption of any fiduciary or transaction, or class of fiduciaries or transactions, from all or part of the restrictions imposed by sections 1106 and 1107(a) of this title. Action under this subsection may be taken only after consultation and coordination with the Secretary of the Treasury. An exemption granted under this section shall not relieve a fiduciary from any other applicable provision of this chapter. The Secretary may not grant an exemption under this subsection unless he finds that such exemption is—
   1. administratively feasible,
   2. in the interests of the plan and of its participants and beneficiaries, and
   3. protective of the rights of participants and beneficiaries of such plan. (The emphasis is mine.)

That is a broad grant of authority. The Secretary of Labor is not required to issue exemptions, by “may” do so. If it is granted, it may have conditions. However, the Secretary cannot issue an exemption unless, among other things, the Secretary “finds that such an exemption is…protective of the rights of participants and beneficiaries” of the plan.

The plaintiffs in the lawsuits—primarily from the insurance industry—argue that the Secretary cannot have, as a condition, a standard of care that is not otherwise required by the law. For example, broker-dealers are subject to Reg BI’s best interest standard; investment advisers are subject to a fiduciary standard; and insurance producers are required, for annuity recommendations, to “have a reasonable basis to believe that the recommended option effectively addresses” the participant’s or IRA owner’s needs and objectives.

However, the amended PTEs 84-24 and 2020-02 impose care and loyalty obligations that mirror ERISA’s fiduciary responsibilities.

So the courts must determine if the grant of authority in Section 408(a) is broad enough to allow the DOL to impose those standards of care where the Secretary has determined that the heightened standards are necessary for the exemption to be adequately protective of the interests of participants and beneficiaries.

As far as I know, this is an issue of first impression for the courts and certainly since the Loper Bright decision earlier this year. Since there is little, if any, authority for the courts to rely on, this may need to go to the Supreme Court to be finally decided.

One of the curiosities of this issue is that, if the DOL can’t determine that the interests of participants and beneficiaries will be adequately protected without a heightened standard of care, the Secretary would need to refuse to issue an exemption, resulting in absolute prohibitions for certain fiduciary recommendations, for example, rollover recommendations. Obviously, that isn’t an outcome anyone desires.

Concluding Thoughts

The grant of authority to the Secretary of Labor to issue exemptions is expansive. At first blush, it would appear that the Secretary’s authority to issue exemptions and to establish conditions is almost unlimited. But the courts will need to determine whether a standard of care falls within the Congressional grant of authority when ERISA was enacted in 1974. An argument in favor of using the heightened standards is that the DOL has, over the years, issued a number of exemptions with standards of care. An argument against it might be that conduct standards have been delegated to other agencies, for example, the SEC and the state insurance departments.

We shall see.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.